Insurance in Indemnity in India- A Need?

This article has been written by Shramana Dwibedi. Shramana is a second-year student at Symbiosis Law School, Hyderabad.

Indian Law (The Indian Contract Act, 1872)

The Indian Contract Act which by way of its section 124 provides for indemnity gives a narrower interpretation of seeing at insurance contracts. The indemnity contracts only arise out of any loss occurring to the indemnified due to any fault either caused by the indemnifier himself or due to the act of a third party. It does not recognize any other form of loss apart from the ones caused by human conduct. Therefore, a contract for payment for loss that has taken place due to a natural event like fire, etc. is not an indemnity as per the Indian Contract Act, 1872 as this kind of loss is not due to human misconduct. Therefore, the court provides that such insurance contracts must be dealt by way of separate legislations such as the Insurance Act, 1938 and should not be brought under the rights and duties described in indemnity. Hence, insurance contracts do not fall under indemnity contracts and therefore not also under the Indian Contract Act. Marine accidents are considered to occur from non-human agency and therefore, they are dealt as marine insurance and not as indemnity.

The High Court (J. Chagla) in [1]Gajanan Moreshwar Parelkar vs. Moreshwar Madan Mantri has upheld, “This definition covers indemnity for loss caused by human agency only. It does not deal with those classes of cases where the indemnity arises from loss caused by events or accidents which do not or may not depend upon the conduct of the indemnifier or any other person, or by reason of liability incurred by something done by the indemnified at the request of the indemnifier.”

The same essence was to be seen in the case of [2]United India Insurance Co. vs. M/s. Aman Singh Munshilal. The cover note stipulated delivery to the consigner. Moreover, on its way to the destination the goods were to be stored in a godown and thereafter to be carried to the destination. While the goods were in the godown, the goods were destroyed by fire. It was held that the goods were destroyed during transit, and the insurer was liable as per the insurance contract. Going by the above case, the person delivering the goods was not asked to indemnify the plaintiff for the losses even though the accident occurred during the period of transit. Since, this act of fire was a natural event and not due to human conduct, remedy was not by way of the indemnity clause in the Indian Contract Act, 1872, rather it was in accordance with the insurance contract under which the goods were insured.

The [3]Law Commission of India, on the contrary, in its 13th report on the Indian Contract Act, 1872 advised a recommendation that the understanding of indemnity must be expanded to include within its horizon, insurance contracts too as both the contracts share the same essence, making good the loss of another. It was recommended to include those cases also within the hold of indemnity which happened not only due to human conduct but also other natural cause.

It can rather be contended that the Indian Judiciary has always been wider in interpretation (especially in matters of fundamental rights) as it has social benefit to be its main agenda. Law in India has always been upright and balanced. It is not prejudiced to issue a harsher verdict upon the defaulters only to appease the aggrieved. Law shall punish only to the extent of wrong committed. Indian legislations are primarily social welfare legislations that have come up to improve the standard of lives of the people of India post the colonial era, to give to its people a law that has as its aim- benefit of the society, a law that upholds the morals and integrity of the society.

Section 125(1) of the Indian Contract Act, 1872

[4]125. Rights of indemnity-holder when sued.—The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor— —The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor—”

(1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies;

An understanding of this clause provides that an indemnity holder may ask for damages from the indemnifier only to the extent of indemnity contract as decided between them. This means that the liability for the indemnifier will be only to the extent he has agreed to undertake as per the contract (whether implied or express). This means that in a contract of indemnity, there is a substance of prior knowledge as to the possible repercussions and losses that a promisee may suffer in a particular contract of indemnity. Knowing the same, the promisor too assents to take the liability for the losses. Within Section 124 of the Indian Contract Act, 1872, the promisor shall only indemnify the indemnity holder for any losses that occur to the latter for an act of the former or any other third party. Therefore, the possible losses are well-defined and any act that does not fall within this purview cannot make the indemnifier liable. If in cases, the indemnity-holder tries to extract indemnity sum from the promisor for acts that are beyond the losses the indemnifier agreed to provide, the court shall not order the latter to cater to such sums also. Therefore, on a concluding note, losses to which the indemnifier has agreed to or losses that are arising out of his misconduct or that of a third party’s will only be borne by him. There must be a nexus between the act of the indemnifier or the third party with that of the loss suffered. The concept of remoteness of damages arise that for a remote damage that is by no way connected to the contract of indemnity, the indemnity-holder shall not hold the indemnifier responsible.

However, in cases of insurance, the policy-holder or the insurer is unaware of what possible damage can occur to his insured property. There is a wide array of possibilities and the absence of any well-defined, limited conditions for only which the insuring company should pay. There is no prior assent to only a few particular kinds of accidents to the insured property for which liability will be that of the company. Any loss that occurs to the insured property will make the insurer liable. This condition is also not absolute and before making payment for the losses, the insuring company carries out a survey as to whether the accident has been caused by a genuine reason or has made crafted only to extort money from the insuring company. When the survey is found satisfactory, the loss has to be paid for any sort of an accident which may include human conduct such as theft or any natural cause such as fire affecting the insured property. This loss may be remotely connected to the case and there was by no means a way of anticipation on either part of the insuring company or the policy-holder that such a misfortune could take place. Even in the absence of prior knowledge, for any possible damage, the insurer has to pay.

Therefore, insurance is a more secured policy where liability is for a wide range of cause of actions for an accident. It is more general as compared to indemnity where liability is narrow and only for a select few, previously agreed cause of actions.

Hence, it is best that insurance contracts are governed by separate legislations as if insurance is included within indemnity, then the scope of liability will have to be narrowed down to meet the requirements of the Indian Contract Act, 1872. If the scope is narrowed and only kept limited to the liabilities that the insurer company has only agreed to while contract making, then the policy-holder will not have a safeguard against any freak, remote accident that he suffers but could not anticipate during entering into the contract. Therefore, considering the nature of Indian laws that speak of welfare, in order to preserve interests of the public, insurance legislations which are wider in scope should only govern like contracts.

Another point that needs to be mentioned here that if instead of narrowing down insurance contract conditions to meet the needs of indemnity as per the Indian Contract Act, the very clause of indemnity is expanded in order to include the wide range of accidents including those caused by non-human conduct such as natural disasters, also if the interpretation also negates section 125(1) that the extent of liability should not only be limited to previously agreed upon conditions but must also stretch to any possible form of accident or loss to the promisee, then the position of the Act shall connote a negative sense. It is a known fact that losses arising out of natural causes are more severe as compared to acts of human misconduct, the amount of indemnity shall also increase manifold. By including remote, natural causes of accidents within indemnity will mean that an indemnifier will have to pay hefty sums to make good a loss that he, prudently could not have foreseen. Hence, this would amount to unjustness to make a person pay such large sums for remote accidents. An insuring company on the other hand is such a corporate entity that sees regular deposition of premiums by its clients has enough wealth to pay large sums of money which an individual indemnifier will fail to. Therefore, it is only possible for an insuring company to make good the losses suffered by another of a high magnitude and sum.

For the above reasons, I am of the opinion that an indemnifier must not be held liable for accidents arising out of natural causes and for remote acts as well. He being an individual can only arrange to take care of the liability that he has expressly or impliedly promised to or assented to. If modifications are brought to the indemnity clause under the Indian Contract Act, 1872, then the indemnifier will be booked for unforeseen damages will shall be unjust. This will lead to greater cases of non-payment by the indemnifiers and hence, increasing number of suits in the court. Consequently, the aggrieved will face hindrances in obtaining payment which may cause him further harm. However, if an insurance company that is in possession of greater wealth can be made liable for the losses of a wide range, the aggrieved shall receive remedy faster which is the aim of social welfare legislations- to provide effective and speedy remedy to the aggrieved. Also, the insurance company takes liability only against deposition of premiums by the policy-holder, hence, their consideration is also well protected here. They are not made to pay for such damages without any consideration. If an individual pays for such losses that are remote in nature, it will be like imposing liability unjustly on that person as he will face utter loss. On the contrary, an insurance company acts only because it receives equivalent premiums for the liability it promises to undertake, Therefore, there is no loss to the company as an end result, as the company too has liability only to the extent of premiums deposited and scheme of insurance policy undertaken. There is hence, no unjust payment expected from the company that goes beyond the scope of its liability or consideration provided.

[1] A.I.R. 1942 Bom. 302, at p. 303

[2] A.I.R. 1994 P. & H. 206

[3] Law Commission of India, 13th Report on the Indian Contract Act

[4] The Indian Contract Act, 1872

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